An Empirical Research On The Influence Of Free Cash Flow On Chinese Listed Companies' M&A Performance

In recent years, a new tide of M&A has started around the world along with the acceleration of economic globalization. Simultaneously, more and more M&A transactions have appeared in our country. However, a series of empirical researches show that the results of M&A are not satisfactory. To find out the factors that affect M&A performance and to take effective measures to regulate M&A activities of listed companies mean a lot to the improvement of M&A performance. It's well-known that the goals of shareholders and managers are not consistent with each other in the modern enterprise system. Managers, only considering their own benefits, may carry out some inefficient M&A transactions which are harmful to the shareholders or even to the society. So it's urgent to investigate whether M&A activities can improve the performance of companies, and whether managers are inclined to do some eyeless M&A activities for their own interests. Based on Jensen's Free Cash Flow Hypothesis, this paper tries to judge whether the agency problem is an important factor that harms M&A performance, through discussing the relativity between free cash flow and M&A performance.This paper does an empirical research by building a multiple linear regression model. In this model, M&A performance of listed companies is chosen as dependent variable, while free cash flow is the independent variable. And increase rate of dominate business, proportion of state-owned stock, whether to be related party transactions are taken as control variables, together with other eight variables which may also influence M&A performance. This paper uses principle component analysis method to attain integrated scores of the sample companies from the year before M&A, the M&A year, the first year after M&A, the second year after M&A and the third year after M&A. Then by comparison of these integrated scores before and after M&A, the dependent variable - M&A performance of listed companies can be attained.The results of empirical research in this paper show that there exists a remarkably negative correlation between M&A performance of listed companies and free cash flow, i.e. the more free cash flow a company owns, the worse its M&A performance is. And it validates that when a company has rich free cash flow, its managers are more likely to take improper M&A activities, just taking their own benefits into consideration, and that the agency problem is an important factor that harms the performance of M&A.